Weird house? Good luck getting a mortgage
Dear Liz: I seem to be in a “Catch-22″ situation. My mortgage refinancing was about to close when the lender backed out because I live in a geodesic dome home and there are no comparable sales for domes in my area. I’ve tried to find another lender but none will finance a dome because there are no similar homes to gauge the value. I feel that I am being discriminated against because my house has a rounded roof over part of it, instead of a flat or peaked roof. My broker suggested that I get a reverse mortgage since this does not require comps. However, I do not want to go down that road. Do you have any ideas of what I can do to refinance, now that I’ve lost the low rate I was locked into?
Answer: In the real estate boom, lenders stopped worrying so much about little niceties like accurate appraisals. With the credit crunch, lenders are suddenly obsessed with appraisals, which typically require comparable sales.
“The problem with this is that there is no way to come up with a realistic estimate of value for properties with unusual construction type because there are rarely comparable sales,” said Dick Lepre, a senior loan officer at RPM Mortgage. “This includes domes, log homes and straw bale construction.”
What you need to find, Lepre said, is a local bank that intends to hang on to the mortgage, rather than sell it to investors. These lenders tend to be more flexible, but there’s no guarantee you’ll be able to find one willing to refinance your loan.
Your situation should serve as a warning to anyone who’s considering buying an unusual home, Lepre said.
“Anyone purchasing a home with any of these construction types should understand that mortgages are and will always be difficult and [that] it is a lot harder to find buyers,” Lepre said. “It is harder to find buyers because there are a limited number of people who want to live in such homes and also because it is harder for those buyers to find financing.”
What to do when a mortgage modification stalls
Dear Liz: I have tried to work with my bank to modify my mortgage loan for the last six months. I send it every piece of paperwork it requests, but nothing is done. I bought my home for $280,000 and it’s now worth $110,000. My payments are very high and I’m getting depressed.
Answer: Contact a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find links at www.hud.gov. This free counselor can review your situation and help you deal with your bank.
You may need to face the possibility that a loan modification may not help. Sometimes to create an affordable payment, lenders would have to reduce the amount you owe, which few are willing to do. Even if you do get a payment you can afford, you probably will owe more than your house is worth for many, many years to come.
To help you sort through these issues, read the Nolo book “The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket” by attorney Stephen Elias.
Paying cash vs. getting a mortgage
Dear Liz: Maybe you can settle an argument a co-worker and I are having. We live in New York and work for a hedge fund administrator, but we’re not really savvy investors. Let’s assume my co-worker has $400,000 in cash, no debt, some money in a 401(k) and wants to purchase a home for $200,000.
Should she use 50% of her cash for this purchase even if she has the credit rating to get a great mortgage? She believes that not having a mortgage payment means she is debt free and better prepared in the event that she loses her job or meets hard times.
I believe that a mortgage is good debt and having $400,000 cash on hand is best so that I’m ready for the right investment opportunity. Who has the right idea?
Answer: You both do.
It’s pretty easy to make the case that you’ll make better long-term returns investing your money in a diversified portfolio of stocks and bonds than you would by paying off a low-rate mortgage.
But some people simply sleep better at night being debt free.
This, by the way, is not a scenario most people will face. Few have sufficient savings to pay cash for a house. Once they have a mortgage, they probably will have many, many better things to do with their money than pay down low-rate, tax-deductible debt, such as save for retirement, pay off high-rate debt, bolster their emergency fund and buy adequate insurance.
The invest-versus-pay-off-debt mortgage debate is less relevant than whether they have all their financial bases covered.
Keep after your lender if you’re refinancing with a HELOC
Dear Liz: I’m in a potentially bad situation with my home equity line of credit. I’m trying to refinance my primary mortgage and would save nearly $150 a month. But the HELOC lender is dragging its feet on agreeing to a subordination. If the lender doesn’t agree, I lose the deal. I’m wondering why the lender does not believe it to be in its interest to help when I am trying to improve my financial situation. Can you give me some insight into the line of thinking here?
Answer: Unfortunately, many would-be refinancers are in your uncomfortable position. They have a second mortgage, such as a home equity line of credit, on their property. These loans are known as “seconds” because the lender is in second position to be paid off when the home is sold, after the primary lender has been paid.
For a refinance to proceed, these HELOC lenders have to agree once again to be subordinated into second position. Some lenders balk because they don’t believe their borrowers have sufficient equity to cover both loans (even though, as you note, a lower payment on the first mortgage could make it more likely that the borrower could make payments on the second).
But a bigger problem seems to be lack of staff and lack of priority. Lenders are so busy trying to meet the demand for refinancing that other concerns, including subordination, often fall to the bottom of their to-do list.
That means you have to be extremely vigilant if you don’t want your refinance deal to fall apart. Call your new lender and your HELOC lender every few days to track the progress of your subordination. If there are problems or missing paperwork, promptly address those issues.
If your rate lock is within two to three weeks of expiring and your subordination still hasn’t been approved, call your HELOC lender and politely ask that your request be given top priority.
If you can’t get through to the subordination department’s main line, ask the phone reps if there is a fax number or e-mail address you can use. If all else fails, take your problem to the bank’s chief executive. You’ll find the name and address online.
More on FICO effects from a short sale
Dear Liz: I’m curious about your recent answer to the folks asking about a short sale. In it, you said, “Short sales . . . typically harm credit scores as much as foreclosures do.” As a real estate professional, I am under a different impression.
Certainly, in financial distress, one’s credit score takes a beating, but I don’t believe there is a code or classification for short sales on credit reports. We generally encourage short sales when possible as we feel short sales allow a debtor to get back on their feet quicker. I’d appreciate other data if you have it, as this would change how I educate clients. I do think we may see some changes in the future. As the number of short sales increases, we may see some way to note such transactions on credit reports.
Answer: The information about how credit scores are affected by short sales comes directly from FICO, the company formerly known as Fair Isaac Corp., which created the leading credit scoring formula.
You’re right that the formula has no specific code for a short sale, which is when the lender agrees to accept the proceeds of a home sale as full payment of a mortgage, forgiving whatever additional balance is owed. But most lenders report short sales as a debt settlement, which has a strongly negative effect on credit scores.
In many cases, the borrowers’ scores were already trashed by late payments and by the notice of default, which is filed by a lender after several skipped payments. A settlement notation or a foreclosure just makes a bad situation worse.
But you may have a good point about the debtor potentially being able to bounce back faster with a short sale. The foreclosure process can drag on for months, and sometimes more than a year, with each missed payment causing additional damage to the borrower’s score. Arranging a short sale may help a borrower put an end to the credit damage so he or she can start the long road back to better scores.
